First-time mortgages: Climbing through the obstacle course
Monday, 14 September 2009 05:19
In the current credit crunch, obtaining a mortgage for the first time may be one of the most challenging aspects of personal finance.
Cautious lenders doling out loans to only the quintessential borrower have left many with the hopes of owning their own home stumbling along.
But if property ownership is the will then prudent financial planning is the way.
Kelly Gilblom sifts through myriad of products, the sales pitches and the fine print to help first-time buyers gain steady footing.
Before buying
The first thing to do when considering taking on a mortgage for the first time is to carefully budget.
By knowing what is going in and what is going out, you will be more empowered to make a decision about whether you can afford to take on a property right now.
Taking on a mortgage is not the brightest idea if you already have a large amount of debt. Not only are lenders giving the best deals to those with impeccable credit, it's irresponsible and could cost you dearly in the future.
Check your credit report and make yourself the type of person you would want to lend money to. Then it is time to save.
Because of the financial crisis, the days of loans that cover almost one hundred per cent of the value of the property have practically disappeared. Lenders are terrified of defaults as they watch bank losses and write-offs grow.
As a result, they're requiring larger deposits - the percentage of the property value that you are obligated to pay in cash on signing.
Peter O'Donovan, mortgage expert at Bestinvest, says: "The larger the deposit, the better."
"A deposit rate of 25 to 30 per cent is ideal. The best rates are up to 70 per cent."
This means the best interest rates will be given to those who can pay about a quarter of the price up front. It will be difficult to even find a lender who is willing to agree to a first-time mortgage for less.
This will likely be the largest single cost you put toward buying your home but far from being the only.
Endless amounts of not-so-obvious costs also factor in to buying a house. You need to consider things such as how much you're willing to spend on furnishings, repairs, transportation, utilities, insurance etc as a part of your budget.
Mr O'Donovan explains: "The main additional costs to consider are arrangement and valuation fees and stamp duty," which can cost thousands of pounds depending on your circumstances and the value of the property you are buying.
"In regards to insurance, you can shop around to find the best deal so that usually doesn't have to be a big pay out," he says.
Using your budget information and assessment of costs, you can then make an estimate of the value of the house you can afford.
Especially now, being honest and realistic is the key. The novelty of impressing the neighbours will quickly wear off, but defaulting on mortgage payments will haunt you forever.
Websites such as the Financial Services Authority (FSA)'s moneymadeclear have free and easy-to-use budget calculators online. Also, mortgage brokers and financial advisers will guide you in the right direction as well.
Property buying is personal, so make sure the information you receive is relevant to your circumstances.
"When buying a mortgage for the first time, you should look at the market properly. It will take a long time for your property to make money so have patience," says Mr O'Donovan.
The most important thing when starting the process of agreeing on a mortgage is to be aware. Knowledge is the strongest armour against big mistakes that could seriously impact your financial health.
Choosing a mortgage product
When you start to explore the mortgage products available, the sheer volume and variety of mortgages available may leave your head spinning.
Peter O'Donovan explains, however, the choice doesn't have to be so complicated.
"First off, you should look for first-time buyer specials. These could mean reductions in fees or a better deal. Then, compare it to the rest of the market.
"Don't necessarily just look at the smallest rate. Sometimes the smallest rate can mean the biggest fee. It might work out that it's more cost effective to go for the larger rate," he says.
Learn as much as you can about how mortgages work. Brokers and advisers can help you find the product that's the best fit for your personal circumstances.
"Any decent broker would be able to give a first-time buyer good advice."
Comparison sites are handy as well. Further, they help to explain what changing interest rates mean to you personally- an important detail as the UK moves out of the credit crunch.
They will also be aware of special deals in the market that are only available for a limited time. For example, right now stamp tax has been repealed for properties under £250,000 but is currently scheduled to be reinstated January 1st 2010.
Alternatives to traditional mortgages
If you are turned down for a mortgage or can't afford to buy a traditional product there are some alternatives available.
Shared ownership is an option that those who can't afford a particular property may see as a solution. You buy a stake in the home and then pay a small rent to other owners, usually a housing association, on the remaining value.
"In shared ownership you can borrow up to 90 per cent of the value of the property and then essentially pay rent to the other owners. It can be good for people that can't get a decent rate," explains Mr O'Donovan.
"It all depends on the clients' situation. Sometimes looking at shared ownership is a good option."
He adds: "Bear in mind though, revaluing means you could own less of a share than you had originally hoped."
Another possibility is that sometimes lenders will offer easier payment plans, although in the current conditions leniency on repayment is scarce.
Usually alternatives to traditional mortgages are for those who can't get housing any other way. If you're not prepared to take on a property then it is often more pragmatic to rent.
Mr O'Donovan warns, however, that it is all dependent on personal circumstances.
"You really can't say right out that any one thing is a better option."
Other considerations
Taking out a mortgage for the first time is one of the biggest and most important decisions you will make in your financial life.
Surround yourself with friends and family members with experience or an excellent broker. Also, beware of scams. If it sounds good to be true, it probably is.
If you do apply for a mortgage do so only once every few months. Regular applications will wreak havoc on your credit score.
Though lending is currently tough and the market has an uncertain future, investing in a house can be very rewarding.
Concluding Mr O'Donovan says: "If you want to buy a property and you're ready then you should."
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